Tax Regulator Rules Out Coercive Action In Angel Tax Issue

The Central Board of Direct Taxes (CBDT) issued a clarification over the angel tax furore and said that no coercive action/measures to follow up on the notices under Income Tax (I-T) act would be taken.

In a meeting attended by revenue secretary Ajay Bhushan Pandey, Department of Industrial Policy and Promotion (DIPP) secretary Ramesh Abhishek and the chairman of the Central Board of Direct Taxes (CBDT) Sushil Chandra, the policymakers said that they will go slow on the I-T notices issued to startups regarding recovery of dues from investments made by angel investors.

It was further agreed that a panel of eminent technical experts from IITs and IIMs will lead the discussions on a new framework to recognise startups including the issue of premiums charged by them of their shares, tax exemptions and other connected matters.

In April, this year, DIPP in consultation with the Department of Revenue (DoR) put in place a mechanism to grant exemption from the provisions of Section 56(2)(viib) of the I-T Act to genuine investors in recognised startups. However, the arrangement has failed to address the issues of startups and investors at large.

CBDT emphasised in its Friday circular that it supports startup innovation and understands they have to be supported “in every possible manner”.

Need To Liberalise Angel Tax Provisions: Amitabh Kant

The CBDT notification might resolve the issue temporarily as it did in February, this year; however, one can’t shy away from the fact that the angel funding has continuously been on a downslide for the last two years.

Accentuating that angel funding is need of the hour for Indian startup ecosystem, NITI Aayog CEO Amitabh Kant said, “We need to incentivise domestic funding in our startup movement. Angel funding is critical for startups and for driving entrepreneurship in Tier 2 and tier 3 cities. We need to liberalise angel tax provisions to unlock domestic capital for Startups, especially since VC funds are not taxed.”

He further tweeted, “All Indian angel investors can be registered as accredited investors for their complete KYC compliance. This can help in domestic investments rising from the current 10% of all startups investments to over 50% over the next two years. This will trigger a new wave of startups.”

Sharad Sharma, co-founder of iSPIRT Foundation seconded this. Sharma told Inc42, “There needs to have an accredited investor category enabling the regular startups to raise funds from angel investors easily with clarity on the source of funds.”

 The Uproar Over Angel Tax

In November, the Ministry of Consumer Affairs (MCA) issued notices to more than 2,000 startups that have raised money since 2013. The notices were mostly sent to the startups whose valuations had fallen after the first round of fundraising.

Later in a tweet, it was clarified that certain GNL-2 forms filed with private placement offer letters were marked for resubmission with a query to justify high share premiums.

To express their discontent, startup founders and investors took to Twitter. On December 17 Goodbox CEO Abey Zachariah, tweeted: “Startup founders in Bangalore who are getting notices for angel tax, please DM me. A friend may have to shut down his company as he got an angel tax notice. Angel tax is startup killer.”

The tweet was picked up by startup evangelist and founder of Aarin Capital, TV Mohandas Pai. He tweeted: “Draconian angel tax torturing startups: It’s killing genuine innovation. ⁦@PMOIndia⁩ ⁦@narendramodi⁩ ⁦@arunjaitley⁩ ⁦@sureshpprabhu⁩ ⁦@sanjeevsanyal⁩ Sir this has started again in big. Please intervene. Urgent.”

With this the protest against angel tax notices spread like a forest fire with Anand Mahindra, Biocon CEO Kiran Mazumdar Shaw, Snapdeal founder Kunal Bahl, entrepreneur, investor Rajesh Sawhney and others tweeting in support of abolition of angel tax.

After a social media storm, Union Minister of Commerce & Industry and Civil Aviation Suresh Prabhu said that they have taken up the issue.

However, a media report said that the I-T department is unlikely to withdraw its scrutiny despite assurances from Prabhu and CBDT.

“Notices were issued to those startups that have been unable to explain the rationale of high share premium received from the issuance of new shares in unlisted firms. In some cases, the cash flow of these startups was low or nil, in which case, the excess amount over fair value is taxable,” an official reportedly said.

On December 18 a team from the community-based social media platform LocalCircles met with the Startup India officials to discuss tax issues faced by the startup ecosystem and said that short-term as well as, medium-term solutions were discussed during the meeting.

Commenting on the development, Nakul Saxena, director-policy, iSPIRT Foundation told Inc42, “Startups are a strong engine of growth for the country and will play a large role in India’s journey to become a $10 Tn economy by 2030. We should incentivise domestic capital and ensure that Indian investors, who are only 10% of all capital, play a larger role.”

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